Alex Blackburne outlines 10 signs that suggest sustainable investment – incorporating social, environmental and financial returns – is on its way to becoming a mainstream strategy for investors.
1. £8.6 trillion was invested sustainably or responsibly worldwide in 2012
According to the Global Sustainable Investment Alliance (GSIA), a network of the world’s seven largest investment forums, 21.8% of assets under management around the globe are invested sustainably. Sixty-five per cent of this total is invested in Europe, while a further 31% can be found in the US and Canada.
A subsequent white paper by the Network for Sustainable Financial Markets claimed that only around a tenth of this figure (£976 billion) was invested with sustainability in mind. However, the fact the remaining £7.6 trillion is classed by GSIA as sustainable, when it may have been invested in that way for purely financial reasons, is encouraging to say the least.
2. As a sector, its funds under management are growing at 20% a year
According to data from responsible investment research firm EIRIS, the average year-on-year growth of money invested in green or ethical retail funds in the UK was over 20%. In 1991, such funds had just £318m invested in them. By 2012, this figure was nearly £11 billion – over 3,300% higher.
3. It’s no longer a niche; the big finance and media players are talking about it
When a financial giant like UBS is writing about, and dedicating a whole report to, the fact sustainable investment has become mainstream, you would be foolish not to agree. Its July 2013 study concluded by saying sustainable investment offers investors “competitive investment results, the ability to make a beneficial impact on the world in which they live and an avenue for expressing their values through their investments.”
US stock exchange Nasdaq recently blogged about how the strategy had become mainstream, while even the relatively conservative Bloomberg and Financial Times have written about the positive upward trends in the sector.
4. It’s no longer about simply negative screening, but positive selection of fast-growth sectors and technologies
One of the common misconceptions about ethical investment (and perhaps a reason it’s evolved to be known as sustainable investment) is that it’s purely about excluding sin stocks like tobacco and pornography. This couldn’t be further from the truth.
In fact, sustainable investment in 2013 is often about selecting stocks based on their role in tackling key sustainability issues, such as climate change, environmental degradation and water scarcity. So this could be companies developing clean energy technologies, working in sustainable agriculture or coming up with innovative solutions to the population crisis.
Solely for treehuggers, it is not.
5. The range of different vehicles available is growing (funds, direct investment, community shares etc) – many of which are tax efficient
Investment generally is no longer the pastime of a select group of extremely wealthy individuals. Thanks to the growth of crowdfunding investment platforms and the many community share projects that have taken place across the country, almost anyone can be a sustainable investor.
For serious investors, though, things like the enterprise investment scheme and venture capital trusts have allowed them to invest in small-scale, fast-growth firms – many of which are promising social enterprises – while getting tax breaks in the process.
A wide selection of investors now see sustainability as a sensible, long-term financial decision.
6. Keeping the lights on is a concern for everyone
Clean energy and energy efficiency will be essential for UK energy security in the coming years. They will help diminish our reliance on fossil fuels – scarce commodities bought at volatile prices from unstable regimes – and help reduce greenhouse gas emissions to assist the climate change fight.
Billions are invested each year in renewables such as wind, solar, wave, tidal and biomass, and given the finite nature of high-polluting energy sources such as coal, oil and gas, money pumped into the sector is only set to increase.
A sustainable investment in energy can be anything from buying solar panels to stick on your roof at home to putting a few thousand pounds in an investment fund that looks to find clean solutions to the energy crisis.
7. The smart money is already invested sustainably
Britain desperately needs innovative and disruptive industries to create new jobs and help UK plc compete on a global stage. Smart investors have already seen the potential of emerging sustainable industries and technology and got in at the ground floor. Resource intensive sectors are seeking greater efficiencies and working with the insurgents to help them clean up.
Tax efficient schemes such as enterprise investment schemes, seed enterprise investment schemes and venture capital trusts have ploughed money into cleantech – renewable energy, energy efficiency, and so on. Many are now paying handsome returns to higher tax rate-paying investors.
Companies that persist with unsustainable practices and systems will experience increased public opprobrium, greater volatility in revenue, costs, profits and share price, and be increasingly viewed as unattractive to investors.
8. The unsustainable investment sector that created the current economic crisis is slowly changing
Storebrand, a major Norwegian pension fund and life insurance firm, recently revealed it would be divesting from 19 fossil fuel companies to ensure its investors got “long-term, stable returns”. This was the latest example of a mainstream institutional investor looking at a more sustainable investment strategy for financial reasons.
The economic crisis that began in 2008 was caused by the big banks. Plenty more has gone wrong with finance in the five years since, but out of the devastation has come alternative forms of investment that don’t have the unwanted baggage of the mainstream industry.
Investors have seen the effect that intense speculation and unsustainable gambling can have on their own money. Sustainable investment, by definition, prevents future crashes and protects your assets.
9. Rather than being an activity that only attracts the ethical as a form of philanthropic investment, it consistently delivers healthy returns
Ethical investment is no longer a synonym for negative screening. That much, we have already established. It is also not simply another form of philanthropy.
While sustainable investors often have philanthropic (it literally means a love of humanity) motives for investing sustainably, the financial returns harvested can be very healthy. Just like mainstream investment, there are good sustainable funds and there are bad. These funds often depend on the skills of the fund manager.
Find a good fund with a good manager, and you’re in business.
Similarly, things like renewable energy community share offers very often provide investors with better, more stable returns than they would get if they opened a savings account on the high street.
10. It’s being seen more and more as the right thing to do
Investors are increasingly seeing the flaws in profiting from other people’s misery and creating a world they wouldn’t want their children to inherit.
Investor alliances collectively worth trillions of dollars have consistently called for governments and the financial services industry to do something about climate change – or else face huge social, environmental and economic impacts.
Greater transparency is needed in investment – and this applies for green and ethical investment funds, too – to expose and highlight just what investors’ money is going towards. If you, as an investor or bank customer, are happy to fund atrocious human rights abuses, industries that kill people and the very destruction of our only planet, then so be it.
But sustainable, responsible and ethical investment is on its way to the mainstream, and those who deny that will find themselves very lonely, very soon.